UK telcos face £3.3bn 'loyalty penalty' lawsuit

Postpaid users who took out a contract for a handset plus network access, and then stayed on that same contract after it expired, have allegedly been overcharged. This is because, according to the lawsuit, the cost of the contract should be reduced once the term ends because by then, the phone part of it has been paid off – but the operators allegedly haven't been doing this.

The class action has been brought by Justin Gutmann, an independent consultant and so-called consumer champion who takes on big corporations on behalf of people who lack the knowledge, time, and money to do it themselves.

He claims this 'loyalty penalty' has been levied on as many as 28.2 million contract customers, and that each one could be entitled to as much as £1,823 in compensation. The lawsuit seeks a minimum of £3.3 billion in damages. Potentially-eligible customers have automatically been included in the class action.

"I believe these four mobile phone companies have systematically exploited millions of loyal customers across the UK through loyalty penalties – taking over £3 billion out of the pockets of hard working people and their families," Gutmann said. "These companies kept taking advantage of customers despite the financial crisis of 2008, Covid and now the cost of living crisis. It's time they were held to account."

Oddly enough, one of the telcos named in the suit – Virgin Media O2 (VMO2) – has drawn attention to precisely this practice, referring to it as the Smartphone Swindle.

According to its own study, handset overpayments cost UK consumers £530 million every year, and in August it launched an online calculator that lets individuals work out roughly how much they might be overpaying.

VMO2's campaign might backfire spectacularly if this lawsuit leaves it on the hook for millions of pounds of compensation.

And there will be little sympathy from cash-strapped customers who have been forced to swallow mid-contract price rises averaging 14.4 percent this year.

As for Gutmann, this isn't his first rodeo.

Last summer he brought an £853 million class action against Apple, accusing it of using iOS updates to throttle the performance of older iPhone models to the detriment of millions of customers and in breach of competition law.

The same claim – which became known as 'batterygate' – was made in a class action in the US and resulted in Apple being ordered to pay up to $500 million, so this one looks like a slam dunk.

Indeed, in November the UK's Competition Appeal Tribunal (CAT) allowed the batterygate case to proceed, and denied an appeal from Apple to have it thrown out.

Gutmann must be feeling pretty confident he is on a similarly-solid legal footing this time.

Indeed, in 2018, Citizens Advice made a rare super-complaint about loyalty penalties to the Competition and Markets Authority (CMA), which said "we do not consider that providers should continue to charge customers the same rate once they have effectively paid off their handsets at the end of the minimum contract period. This is unfair and must be stopped."

Even if the big four find a way to wriggle out of paying, this lawsuit will hopefully bring the curtain well and truly down on loyalty penalties and smartphone swindles.